Help to Buy: Everything you need to know

The second phase of the Government's Help to Buy scheme launches today. Here
is a comprehensive guide as to what it is, how the rates compare and how you
can apply.

Bank branches will stay open late in anticipation of huge demand for Help to BuyPhoto: Alamy

By Richard Dyson and Rebecca Clancy

11:17AM BST 08 Oct 2013

What is Help to Buy phase two? The first phase applied only to newly-built property being bought by first-time buyers. This second phase applies to all property, old and newly-built, provided it costs less than £600,000. And loans are available to all borrowers, not only those buying a home for the first time. Borrowers who qualify will be offered a loan of up to 95pc of the property’s value. This second scheme works by providing a guarantee whereby the Government would make good lenders’ losses if the property was repossessed and prices fell. This bit of the scheme was initially due to begin next year, but was brought forward.

- Royal Bank of Scotland (which owns the NatWest brand): It has only two options - borrowers with a 5pc deposit and who meet the bank’s other lending criteria - regarding income, credit history and so on - will be able to choose between a two-year fixed rate of 4.99pc and a five-year fixed rate of 5.49pc. There are no fees.

- Lloyds Banking Group (which owns the Halifax and Bank of Scotland brands): From Friday it "is launching products at 90-95pc loan-to-value, available for both first time buyers and homemovers." It did not describe the full range, but said: "The rates, available up to a maximum loan to value of 95pc, include a 2 year fixed rate at 5.19pc with a £995 product fee. Further product detail will be available in due course." In other words its two-year deal is slightly worse than RBS's.

- HSBC: Europe's biggest bank by assets said it was extending its current range of mortgages to include 90pc to 95pc mortgages, and has made almost £5bn available for mortgages above 75pc in 2013 and plans to allocate a similar amount in 2014

- Virgin Money: Will start offering loans in 2014

- Aldermore Bank: Will start offering loans in 2014

Is the scheme worth it? David Hollingworth, associate communications director at broker London and Country Mortgages, said that while people with a 40pc deposit can get access to rates below 2%, the reality is that people with a deposit of just 5% were never going to see rates "radically" drop.

He said of people with low deposits: "You are going to have to pay more and prove your credit history. This isn't about ripping up the lending rules that have been developed in recent years."

The rates announced so far only narrowly beat what is already out there on offer from lenders who are not benefiting from the Help to Buy subsidy. Leeds Building Society for instance offers a 5.39pc five-year fix which undercuts RBS’s equivalent rate - although there is a £999 fee. Yorkshire Bank offers a two-year fix at 5.49pc, with no fee. Do your own calculations on rates for your loan with our mortgage calculator.

What are the risks? The primary risk is that interest rates will rise. Not only could this squeeze borrowers monthly cashflow but it could impact on house prices - meaning those with little equity to begin with could be exposed to the risk of negative equity. Paul Taylor of McCarthy Taylor, a chartered financial planning practice, said: "The risk is that yet again people will be encouraged to take on significant liabilities on thin financial criteria.

"Interest rates will go up, it is only a matter of time with the ending of quantitative easing and many of these borrowers will struggle because of the extent of borrowing against the property value and their income. We are assured that strict tests on income will be applied, but these will almost certainly be based on low interest rate assumptions."

Should I use Help to Buy if I have the money elsewhere - or my family is prepared to help me find it - in order to make up a bigger deposit? No. The rates so far under Help to Buy are too high to make this feasible. If you or your family can find 20pc deposit, for instance, then you should avoid Help to Buy and simply find the lowest rate available.

I’m close to a 10% deposit, is it better to wait? Ray Boulger, mortgage expert at broker John Charcol, advised: “It depends how close you are to reaching the 10pc. For buyers at over £250,000 having to find at least 3pc stamp duty will already be a further challenge. The trade-off between waiting to bring the deposit up to 10pc will be the much cheaper rates and greater choice of lender, and hence criteria, available at 90pc loan-to-value against the likelihood of having to pay more for the property by waiting.” Will I have to pass the ordinary credit checks as if I were applying for any other mortgage? Yes. You will need to demonstrate the same - if not better - credit history and level of income to cover mortgage repayments. The banks offering Help to Buy will have affordability checks in place to ensure that even if interest rates rise, your income will cover repayments.

What will happen to house prices over the next few months? House prices are rising across the UK. Last week, figures from Nationwide Building Society showed all 13 UK regions saw annual house price growth in the third quarter, with the average property now rising in price by 5pc per year. This is expected to continue in the coming months as more people have access to mortgages, which will further stimulate the market. Critics say Help to Buy is artificially pushing up house prices and could cause the next housing bubble.

Will the scheme have an effect on other mortgage rates? It is hoped that with more lending aimed at those with 5pc or 10pc deposits, rates will fall as competition increases. This is a part of the market where competition has been slow to return, despite a wider thaw elsewhere. David Hollingworth of broker London & Country said: "Bringing a major lender like Natwest into 95pc loan-to-value lending is significant enough but these rates do also undercut the few options in the market with the 2 year making the most impression by dipping below 5pc. We will have to see whether they are sufficiently low to spark large take up. There has been substantial interest in the scheme so we will see whether the new rates deliver what buyers were hoping for."

Why has the government launched the scheme? There has been much controversy about the scheme